Pension funds under threat from death-in-service benefits

Many pension funds, which would be required to pay death-in-service benefits in the event of a catastrophic disaster, may struggle to meet their financial obligations, experts have warned.

The World Trade Center 9/11 terror attacks demonstrated the potential loss that life insurers could have, where there are high concentrations of exposure at a single location.

The consequence is that they now typically impose a maximum event limit they will pay per policy following a catastrophic event.

This means that many companies may not have enough insurance to adequately cover the death-in-service benefits of all those who might lose their lives in a catastrophic event, according to risk management firm JLT Risk Solutions.

A company could easily find that the event limit in its policy is less than the total death in service promised, it warned.

This could expose the pension fund and company to uninsured risk. Trustees could also be open to legal action by dependents, if proved that they had not been prudent when negotiating coverage.

Andrew Davis, accident and health adviser at JLT, said: “When joining a pension scheme an individual assumes that in the event of his or her death, dependents will be provided for as per the contract of employment. Now, any payout could be restricted and shared among all the claiming parties, reducing the value of that benefit to the individual.”

“This is a serious issue which pension trustees need to address as exposures can be multiples of the event limit being imposed. We have seen event limits as low a £35m, which is an insignificant figure compared to the exposure per location faced by some companies.”

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